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While Ferro underperformed in 2019, losing 5% of its value, the pending sale of Tile Coatings has changed the company’s business portfolio and, in our opinion, post-closing, New Ferro will become an attractive acquisition candidate.
The sale of Tile Coatings to Spain-based Esmalglass for $460M in cash, and potentially another $32M based on performance between now and closing in 6-to-9 months, should generate net cash of around $400M, at the low-end; it will be used to reduce debt.
Post-closing New Ferro’s financial profile should improve across the board. Based on our tentative 2020 pro forma projections, we expect that gross margin could improve 300 basis points to around 30.5%, EBITDA margin could reach 18%, and net leverage should decline to 2.1x vs 3.6x at the end of 2019 third quarter, and potentially 3.3x by year-end.
While it is too early to estimate the amount of stranded costs, management expects to generate savings above the currently projected $45M level. We believe that following the sale of Tile Coatings, Ferro will be closer to achieving its Vision 2020 targets.
Furthermore, in addition to higher margins, New Ferro will be less cyclical due to its smaller exposure to construction markets. It will also have a lower exposure to FX and to the weak European economies. Given the on-going macro uncertainties, management’s focus will remain on its Optimization Program and on further improving the balance sheet, while still considering small acquisitions of complementary technologies.
As per CEO Peter Thomas, “the pending sale of Tile Coatings is the first step toward delivering substantial value to Ferro’s shareholders”.
In our opinion, New Ferro will become an attractive acquisition candidate for either a strategic player or private equity, and that a 10 multiple will be justified by its improved profitability, lower cyclicality, and lower leverage. We calculate that, based on our 2020 projections, the company could be acquired for around $20 a share. Ferro is our Best Idea for 2020.
